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The ultimate guide – Accounting for startup

30 June 2020

Did you know lack of financial knowledge and planning has been seen as one of the

top reasons why a lot of businesses failed? As a business owner, familiarizing

yourself with the financial system can help you avoid such failures.

Accounting also known as the language of business, too often business owner is

making decision under uncertainty. To helps making better decision, accounting

plays the most important role. Therefore, it is very important for a business owner

understand the language of business.

Fortunately, you need not to master accounting, but you need to understand the basic

concepts to make sure that your business is running smoothly.

We will cover the fundamentals concepts and how to setup your startup accounting

process in this guide. This includes selecting the correct accounting method,

understand financial statements, hiring the right person, choosing the appropriate

accounting software, and having a solid business plan that outlines monthly and

weekly tasks for bookkeeping.

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Table of contents

Chapter

Selecting your accounting method 1

Understand the financial statements 2

Selecting your accounting software 3

Hiring the right person 4

Basic accounting tasks 5

Expert insights 6

Wrapping up 7

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Chapter 1 - Selecting your accounting method

Two accounting methods have been adopted, there are accrual method and cash method. These

approaches will impact how you keep company’s accounts as well as the presentation of the

financial statements. However, accrual method is compulsory for some types of business, its

mainly depends on the country and the industry.

In Singapore, companies with financial period from 1 January 2003 must comply with Singapore

Financial Reporting Standards (SFRS). Accrual method is one of the main principals of Singapore

accounting standard.

Accrual method

Business recognise sales or revenue as soon as they raise an invoice for a customer, in other words,

the sales or revenue must be recognise once the sales take place. In the event when receive a bill

or supplier invoice, expenses must be recognise even if the payment would not be made recently.

Two main benefits of accrual method:

- You have a much more accurate data of business performance.

- You have a more reliable data when comes to decision making.

Two main downsides of accrual method:

- The accounting works will be much more complicated, it is because you have to keep track

on invoices not only the bank account.

- Sometimes you have to pay income tax before receiving the payment from customer.

Fortunately, if the debt is not recoverable, IRAS allows you to claim the tax back on your

next return.

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Cash method

Business recognise sales and expenses only when cash in and cash out from bank or hand. They

do not take in the invoices raised as sales, or bills received as expenses. Sales and expenses will

be counted when they have been settled.

Two main benefits of cash method:

- It is very simple and shows the cash on hand and/or bank.

- Cash-flow advantage, as tax is payable when you actually receive the payment from

customer. Please bear in mind, not all businesses are allowed to use cash method

accounting for tax.

Two main downsides of cash method:

- Lack of accuracy, revenue and expenses is not recorded on real-time basis. The financial

statements may show you profit but it is because you have not made any payment to you

bills.

- You are not able to do decision making with cash method, as the data is not reliable.

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Chapter 2 - Understand the financial statements

Business accounting system is built on balance sheet, profit and loss statement and cash-flow

statement. Each statement serves different types of purpose. As a business owner, you do not need

to know every single details. But you should know how to read the financial statements to help

you with decision making.

Balance sheet

Source: CFI

Balance sheet is the foundation for your company’s financial position as it shows the assets and

liabilities.

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Formula:

➢ Assets – These are items owned by your company and able to produce future economic

benefit. For example, inventory and cash in bank and/or bank.

➢ Liabilities – These are items that your company owe and have the obligations to settle in

the coming future.

➢ Equity – Mainly represents the value of the owner’s investment into the company. It is

also known as total assets minus off total liabilities.

➢ Current assets and liabilities – These are items refer to short-term funds and debts that

you company has, short-term also know as less than a year. Level of liquidity differentiate

short term and long term, current assets and liabilities will be more liquid than non-current

assets and liabilities. For example, business can sell or liquidate their inventory faster than

a warehouse or machine.

➢ Non-current assets and liabilities - The items refer to long term assets and liabilities such

as property, machinery, and bank loan.

Business owner use balance sheet to check company level of liquidity, that is the reason makes

balance sheet important. In the event current assets are greater than current liabilities, that shows

your company is doing well and able to settle its short-term debts. It also show your company’s

efficiency in utilises company’s assets, as well as its ability to generate economic benefits.

Assets = Liabilities + Equity

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Profit and loss statement

Source: CFI

Profit and loss statement also known as income statement. Business owner use profit and loss

statement to check their current year profit. It is a key financial snapshot that helps to access and

evaluate your company’s performance.

Formula:

➢ Revenue – The gross amounts of income company earn from services rendered or selling

products. It represents the total amount of income earned before minus off any expenses

incurred.

➢ Gross profit – Revenue minus off cost of goods sold. This is the actual amounts that

company earned from services rendered or selling products.

➢ Expenses – The money used to pay company’s bills such as advertising, wages and

salaries, rental, and so on.

Net Income = Revenue - Expenses

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➢ Cost of Goods sold – Similar to expenses but not the same as expenses. It is also known

as direct costs. The cost arises when generate revenue.

➢ Net Income – The money company earn during the year, also know as profit.

Cash flow statement

Source: CFI

The cash flow statement shows changes in cash in a specific period. Business owner us cash flow

statement as a tool to analyse company’s efficiency in using cash.

➢ Cash-flow from operating activities – Fundamental business activities for daily

operation, such represents the amounts of cash inflow for services rendered or selling

products. These consist of cash from inventory, accounts receivable and net income.

➢ Cash-flow from investing activities – Cash used or generated when the company do

investment, such as buying other businesses or properties. Usually startup will have high

cash flow from investing activities and produce a negative cash outflow, as they

purchase a lot of assets and looking to grow.

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➢ Cash-flow from financing activities – Cash used or generated when the company

undertakes to get investor financing. There are usually broken down between debt and

equity financing.

The cash-flow statement is a powerful tool to analyse a company’s performance and profitability.

Chapter 3 - Selecting your accounting software

Now you have an overview of the balance sheet, profit and loss statement and cash-flow statement.

Let us discuss the accounting software that help you organise your accounts.

It is very true accounting work is super tedious and time-consuming, some more running a small

business is hard enough, so most of the small business owners running the business without

looking at the company accounts, and this is the top reason that most of the companies failed as

we mentioned earlier. So, please do not repeat the same mistake.

Thanks to technology, accounting software makes the accounting tasks so much easier via

automation tools. This help to save time and reduce human error. By using the accounting software,

allowing you to focus on running your business instead of wasting time on paper works.

We recommended Xero accounting software, as the software is cheap and user friendly. AJK

Consultancy is a business partner with Xero, you will get special rate if you subscribe through

AJK Consultancy.

Chapter 4 - Hiring the right person

Accounting software can be helpful, it will perform even better with the experienced chartered

accountant or bookkeeper. When your business is growing and performing extremely well, too

often, you will need a professional accountant to help. It is because Singapore Financial

Reporting Standard (SFRS) have been changing time to time, and your company must stay

compliance to prevent any penalty and fines.

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Chartered accountant

A chartered accountant is a professional who has certain qualification and working experience in

the accounting industry as an accountant. This person has the knowledge of financial statements,

tax planning, and auditing. There are at advisory role.

Bookkeeper

Bookkeepers do not have the same level of expertise as accountant, but they are also helpful for

businesses. Bookkeepers work on basic tasks such as managing income, expenses and bank

reconciliation.

Everybody can be a bookkeeper as it does not require a degree or a license. So, it is very important

to find a bookkeeper that have relevant working experience and education background. You could

consider hiring a bookkeeper through professional accounting firm or a freelancer.

Chapter 5 - Basic accounting tasks

Small business owner should practice a strong bookkeeping habits on weekly, quarterly and yearly

basis.

Weekly task

➢ Bank reconciliation – This is to check your expenses and income have correctly synced

to accounting software.

➢ Categorise expenses – This is to confirm the company only record eligible expenses in

the company’s accounts.

Quarterly task

➢ GST submission – If your company is GST registered, normally the company is required

to file GST quarterly.

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Yearly task

➢ Submit tax return – Company required to file tax computation and Form C/C-s to IRAS

by annual basis.

➢ Submit financial statement – Financial statement can be audited or unaudited, depend on

the qualification criteria given by ACRA.

Chapter 6 - Expert insights

Insights author: Aaron Tee is a Founder and Director at AJK Consultancy Pte Ltd, who offer

chartered accounting services to small medium enterprise (SME) in Singapore and Malaysia. AJK

Consultancy specialising in outsourced accounting, bookkeeping, tax planning, corporate

secretarial and business advisory services.

What are the biggest challenges for small business when setting up

their accounting?

Keeping your company’s account and ensure they are accurate is very important for all the small

businesses, it will not only help the business owner to make a better decision but also understand

profitability. The biggest challenges for small business is finding the most suitable software for

their businesses. We have experts to help our clients through this.

What advise would you give to startups founders for keeping their

accounting?

Always plan ahead and know your limit, it is impossible to be perfect in everything, focus is always

the key to success. Engaging an accountant that provide value adding to your business, will be able

to offer advice on your business development. Having an experienced accountant will not only

save your precious but also allowing you to focus on running your business.

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Chapter 7 - Wrapping up

Spending some time to understanding accounting will always benefits your company and prevent

business from failing due to lack of financial knowledge.

As a business owner, you do not need to be an expert in accounting, but you need to know the

important concepts that can apply to your business.

The benefits of accounting:

➢ Budgeting

➢ Understand taxes

➢ Stay organized

➢ Improve your company performance

➢ Better decision making

➢ Reduce stress

➢ Have the overview of your business’s financial health

The best accounting practices you can implement are choosing the right accounting method,

understanding financial statements, engaging with the right accountant, implementing the right

accounting software and making sure your bookkeeping is up to date.